At the close of the Summer of 2011, and even lingering into the Fall months, the buzz around Wall Street revolved around one word – Volatility. With inter-stock correlations at bleeding edge highs and stock picking seemingly thrown to the wayside, it was time of a great uncertainty for investors and their saving/spending decisions. Soon however, the whipsaw seemed to moderate, with the VIX volatility index retreating back to pre-Summer levels.
Since this time, it seems that
the average consumer has responded the way that any self respecting American
knows how, with their checkbook, and with force. With the “volatility veil”
having been lifted, and unemployment stabilizing
at what seems to be a moderate clip (down to 8.2% in March, off 10%+ near
end of 2010) the consumer seems to be “shaking it off” through their spending,
specifically in discretionary applications.
·
CONFIDENCE. Put quite bluntly – increasingly
more Americans are getting their jobs back, enticing them to spend more, which
further breeds consumer confidence. Evidence? Consider the University of
Michigan Consumer Confidence Index, which is approaching its highest level
since 2008. While the trend seems to be moderating a bit, there seem to be few
concrete pieces of data that would point to a fundamental collapse in Consumer
Confidence moving in to the back half of 2012.
·
OUTPERFORMANCE. As we’ve seen strength in the
overall market as we enter 2012, we see that the Consumer Sector has
contributed positively to the effort. As far as equities are concerned, asset
allocation that is Overweight Consumer seems to be a relatively safe bet as the
Consumer Sector Linked SPDR (XLY) has outpaced the larger SP500 Index Linked
SPDR (SPY). Continued relative price strength for Consumer Discretionary
equities is posed to continue as long as macro indicators continue to trend in
the upward direction.
·
RESILIENCY. As for an even more hopeful data
point, consider the curve indicating Disposable Income per Capita, which, has
been steadily trending upward since then end of a tumultuous 2008-2009. Even
through the enduring market mess that was Summer/Fall 2011 (S&P downgrades
US Debt, Sovereign Debt Crisis etc) the American consumer has enjoyed steadily
increasing levels of disposable income. The relative strength in Consumer
equities has likely been due in part to the consumer feeling increasingly more
confident; finally spending this income on discretionary purchases,
specifically luxuries. I would contend that this “backlog” of disposable income,
once frozen as a result of international and domestic market blunders, will
continue to leak out of consumer pocketbooks, and drive top line revenues for
well positioned discretionary retailers. Stock picking will come back to the forefront,
with the best returns coming from well positioned consumer equities
experiencing both expansion of their YoY same store sales (SSS) figures, as well as
those with demonstrated margin expansion.
This outlook however, would be incomplete without addressing the risk of what seems like ever increasing prices of gasoline. With U.S. national gas prices recently topping the sentimental barrier of $4.00, and what seems like an approaching “long, hot, Summer,” it leaves few barriers in the way of continued pain at the pump. Still, however, I believe in the resiliency of the U.S. consumer. In the face of rising energy costs, the consumer will turn to some well established alternatives. Whether it’s turning to online retailers rather than brick and mortar retailers, or spending more of their budget at “one stop” club stores to eliminate the need to travel to multiple sites – the consumer will spend. Moreover, energy pricing risk is particularly less prevalent at luxury retailers, who view (mitigating) overall market risk as more of a constraint on their spending.
Take away? Believe in the U.S. consumer as a catalyst for a prolonged economic
recovery, and follow them to impressive market returns.
by Adam Chaput
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